The Court of Appeal in AIG Europe Ltd v OC320301 LLP (formerly The International Law Partnership LLP) has ordered a retrial of the question of whether actions brought by 214 investors in two failed holiday property schemes in Turkey and Morocco against the former International Law Partnership can be treated as a single claim by its professional indemnity insurer, AIG. The investors had paid money into the schemes believing it would be held in escrow until the value of security over the land for the developments equaled the total amount of investments. Instead, in multiple transactions over the course of several months, The International Law Partnership allegedly authorized payments from the escrow accounts, exhausting the funds. The schemes failed, and the investors brought negligence claims against the firm that they believed had failed to safeguard their money. AIG argued that the investors’ claims could be considered one claim for the purposes of aggregation because they constituted “similar acts or omissions in a series of related matters or transactions” (clause 2.5(a)(iv) of the Solicitors Regulation Authority minimum terms and conditions for solicitors’ professional indemnity insurance).

Commercial Court

The Commercial Court (Teare J), in August 2015, did not agree with AIG and refused to grant the declaration, saying: “the most natural meaning of the phrase ‘a series of related matters or transactions’ in the context of a solicitors’ insurance policy is … a series of matters or transactions that are in some way dependent on each other. It is difficult to talk of transactions being related unless their terms are in some way inter-connected.” It had been common ground that the individual transactions were not dependent on each other. Teare J plainly thought that there were 214 individual claims.

Many legal commentators hailed Teare J’s ruling as a victory for law firms, and a major setback for professional indemnity insurers. Based on the judge’s analysis of the aggregation clause, which required the transactions to be “dependent on each other,” it would be very difficult in many cases for insurers to demonstrate that claims by multiple investors in the same project or opportunity could be aggregated. However, it was also acknowledged by the court that there was scope for an alternative construction of the clause, hence the granting of permission to appeal. No doubt the court was also alive to the fact that the answer to this particular question would determine whether insurers were potentially liable for £3 million or in excess of £11 million.

Court of Appeal

Bearing in mind the impact of the ruling on renewal premiums, the Court of Appeal agreed to give its views based upon an agreed statement of facts and agreed questions of principle. On 14 April 2016, the Court of Appeal held that the lower court had gone “rather too far” in determining that the transactions had to be “dependent on each other.” The critical question, according to the court, was whether the negligence or breach of duty occurred “in a series of related transactions,” noting that the word “series” itself usually implied some connection between the events or concepts that constitute the series. In this case it was especially obvious, since the transactions had to be “related,” and that could only mean to one another. But how strong must that connection be? Will any connection do, however remote?

The Court of Appeal did not think that the terms of the policy required the degree of closeness contemplated by “dependence.” It was a case in which it was “necessary to imply [the] unifying factor from the general context because the express language (‘a related … transaction’) is both itself imprecise and deliberately avoids the available wide formulations [of aggregation clauses]. It is for this reason that we have concluded that the relationship must be an intrinsic relationship between the relevant transactions.” A mere extrinsic third factor, such as geographical location, would be insufficient, in this context.

The Court of Appeal distinguished the House of Lords authority of Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance [2003] UKHL 48, which held that in order for there to be a series of acts or omissions there had to be a common causal relationship. In that case, the court determined, the wording in dispute was a different version of the aggregation clause (amended in 2006) than that at issue here. The Court of Appeal also drew a distinction between the phrase “related series of acts or omissions” in the Lloyds case and “series of related matters or transactions” in the present case, holding that, whilst acts and omissions could stem from a single cause, the same could not be said of matters or transactions, the ultimate cause of which was simply the decision by the parties to enter into them.

The Court of Appeal concluded in this case that there “must be some restriction on the concept of relatedness and the most satisfactory approach is that the relation must be an intrinsic rather than an extrinsic one.” Ultimately, the Court of Appeal allowed AIG’s appeal, to the extent that it remitted the case back to the Commercial Court, to be retried on the facts with the benefit of the higher court’s guidance.

The Court of Appeal said it was in no position to make findings of fact, but went on to speculate as to what might be “intrinsic” or not. For example, if the investor’s escrow accounts regarding one investor referred to the contracts of other investors, there might be a relevant intrinsic relationship; if they did not, there might not be. If there was a specific requirement that investors’ funds were to be held in a separate designated account for each investor that might militate against a finding that there was an intrinsic relationship between the relevant matter or transactions for the purpose of the aggregation clause.

Comment

This case is of particular interest because it is the first judicial authority on the construction of the amended aggregation clause in the minimum terms and conditions and, whilst the issue is far from being resolved, the Court of Appeal’s ruling does represent another step forward towards certainty for law firms and insurers.

The Court of Appeal very carefully compared and contrasted aggregation wordings reported in other cases, and in different contexts, highlighting again that when considering aggregation clauses it is vital to consider both the precise wording used and the specific commercial context.